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Thursday, October 2, 2008

Economic deja vu hitting tech startups

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Startup enterprisers can be forgiven for agony flashbacks to the dot-com flop respective old age ago given the recent roseola of unreassuring marks about their industry's health.

The U.S. economic system is sputtering. Venture working capital investing is declining. And to add to the gloom, a drip of startups have got close down or sold out at fire sale prices.

Is it 2001 all over again? Or will the Web menu better this clip around?

Investors and executive directors hold that modern times are getting tougher for startups following respective old age of easy money and large paydays. But the hurting will be more than limited this clip because operating an Internet company is far less expensive than it used to be, they said, although some companies inevitably will be left scrambling.

"For promising companies, support will still be easy to find," said Alice Paul Buchheit, co-founder of FriendFeed, an Internet startup in Mountain Position that assists users follow what their friends station online. "You'll happen it a small more than hard for companies on the edge."

The menace of recession will probably be subject No. One at the Web 2.0 Expo, a four-day Internet industry resurgence meeting in San Francisco starting today that characteristics many of the field's most outstanding entrepreneurs. Thousands of attendants will be asking themselves how to insulate their companies from a slack while guessing who may fall victim.

Pessimism about startups began in earnest last twelvemonth amid the downswing in the existent estate marketplace and the ensuing recognition crisis. The hot marketplace for Web investing inevitably cooled along with the economy, casting a chill across Silicon Valley. VC investing down

Signs of a lag are many.

U.S. venture working capital investings drop to $7.1 billion during the first one-fourth this twelvemonth from $7.5 billion during the same time period in 2007, according to the National Venture Capital Association and PricewaterhouseCoopers.

Another of import indicator, the figure of initial populace offers backed by venture capitalists, is also down. Only five companies - just one a engineering company - went public in the first quarter, the last quarterly figure since 2003, according to the National Venture Capital Association.

Because most startups are unprofitable, they trust on money from investors to operate. Without the cash, endurance for some Web land sites is going to be more than difficult.

Andrew Braccia, a venture rugged individualist with Accel Partners, a Palo Alto house that have got invested in such as blockbuster Web land land sites as Facebook, said the impact will be the top on Web sites that aren't well established and are in niches that have a oversupply of competitors.

Startups will command less evaluations than they did last year, he said, when many were deserving 10s or 100s of billions of dollars, either on paper or in acquisitions.

"There will be an impact on early phase companies, but what the impact will be, I wish I knew," Braccia said.

No 1 anticipates startups to endure the moving ridge of problems that steamrolled the industry starting in mid-2000. Dozens, if not hundreds, of Web land sites close down during the implosion, shutting the chapter on a now ill-famed investing bubble that spawned such as casualties as Pets.com, Toys.com and Webvan.

What put many of today's companies apart is that they are able to work with far fewer employees and at much less costs. Improvements in software system let companies that would have got required 100s of employees during the late 1990s to do owed with a couple of twelve employees today.

"It's a batch easier to prolong a concern if you're not burning billions of dollars a month," said Tod Sacerdoti, main executive director of BrightRoll, an online picture advertisement startup in San Francisco. "You can run on exhaust for months."

Nevertheless, Auren Hoffman, main executive director of Rapleaf, a San Francisco startup that paths people's information online, said investors are pressuring startup executive directors to be frugal, just in lawsuit hard cash goes scarce. Spending on public dealings houses and lawyers will be the first disbursals to be cut, he said.

"A batch of VCs have got been contacting portfolio companies asking them to pass less and travel slower," Malvina Hoffman said. Getting more than cash

Companies are furiously trying to stock up on hard hard cash while they can. Among the up-to-the-minute is Ning, a Palo Alto social-networking company, which said last hebdomad that it raised $60 million in its 4th unit of ammunition of investment, which its co-founder, Internet innovator Marc Andreessen, explained on his blog as a manner "to do certain we have got got plenty of firepower to last the approaching atomic winter," and then added that the company probably doesn't necessitate the money at its current growing rate, "but having lived through the last crunch, it's good to be conservative with these things."

Several companies have close down, such as as Edgeio, an online classified advertisement system, or were sold out for pennies on the dollar, including online picture land site Revver. Whether the figure have increased in recent calendar months is unclear.

Vipin Jain, main executive director of Retrevo, a Sunnyvale shopping hunt engine for electronics, said that the state of affairs will likely be more than than desperate if the economic system goes on in its blue funk for a few more months. No venture rugged individualists desire to drop money into a startup when unsure that they will be able to acquire that money back within two years, he said.

"If the state of affairs maintains on for another one-fourth or so, I believe you'll see some larger problems," Jain said. Web 2.0 Exhibition

The Internet conference starts today and runs through Friday at Moscone Occident convention centre in San Francisco. Online enrollment is closed, but participants can register on site.